Essays on Management: What is innovation and where does it come from?

Innovation involves the creation of new products, processes, services or solutions that someone outside an organisation values.  Business renewal and continuous improvement is not innovation, though is a condition of staying in business.

Research can be direct linear source of innovation, however it is more often an enabler rather than the core driver.  Often the basic to applied R&D approach is too slow and too specialised to lead to innovation.  Innovation typically needs non-linear cross-functionalism to be effective and timely. 

Research is a structured means of learning, typically in a defined field and within a theoretical and methodological framework.  It implies knowledge of prior art and of a field’s broadly-given knowledge state which it can build on.  It is conducted within some kind of theoretical framework or model.  Such theories and models should not be seen as representations of reality but as aids to thinking.

Research competencies are scarce resources and can only support limited opportunities.  Because of the potential for waste, significant thresholds are needed before substantial investment is made in research.  Much innovative effort and R&D expenditure is wasted because it fails, or because of “winner take all” and “tournament effects” where one or a few winners capture benefits disproportionately.

Research that is supposed to underlay future innovation is often best focused on today’s problems.  In doing so the problem may be cracked, and spin-off basic knowledge may arise that seeds new innovation opportunities.  As Pasteur demonstrated, fundamental and generic science that creates technological platforms for multiple innovations can come from highly specific and practical industry problems.  Pasteurisation and the science of biochemistry was a spin-off from solving practical problems in the French wine industry.  Microwaves were a spin-off from radar system development.  Radio-astronomy developed as an offshoot of telecommunications research.

R&D is not innovation, though it may be an integral part of it.  This is why R&D should not be singled out for favourable tax treatment, since it is only part of innovation.  Innovation harnesses knowledge for value-creating and externally-determined purposes.   This is a social process where technical people have to make themselves understood, and where customer, ergonomic, product lifecycle and servicing considerations need to be embedded in the early stages of product development.  Innovation has to be built into an organisation systematically and become a habit.  Innovation is dynamic, so feedback and reflectivity need to be built into organisational processes.

Innovation drives economic growth through the externalities it creates.  It typically involves some non-rival and non-appropriable elements.  Knowledge generated by innovation cannot be fully captured and so will spill-over and allow others to use it.  Innovation also creates building blocks for future innovation.  Therefore while innovation is driven by commercial benefits that can be captured within a firm, in so doing it generates social benefits going beyond the business.  These spill-overs mean innovation’s social benefits exceed the private – one of the most consistent empirical findings in economic literature.

Externalities from innovation tend to be associated with the innovative, fluid and creative phases rather than the production phases, however it is the systemisation of production that makes innovation profitable and which ultimately funds future innovation waves. For these reasons, innovative capabilities in an economy or business must be complemented by the applied technologists, trades people and others who can implement and apply innovations.

Successful innovation is only rarely focused on broad-sweeping opportunities and more commonly involves tightly-focused and market-influenced steps forward.  It may service a tiny market today which is a microcosm of tomorrow’s mass market.  An innovation should aim to do one something quite simple and if it is too complicated it will likely founder on a detail or the lack of a complementary capability.

In a globalised and connected world the market is increasingly offshore, sometimes right from the beginning.  Many New Zealand companies are now “born as globals”.   However, even these businesses are focused on what a tightly defined customer will value, even if customers are scattered in sliver markets around the world.

Innovation goes through messy phases, and it is often difficult to balance nurturing a new product or innovation while building system and performance measures around it.  However innovators demand tidiness, order, discipline, and often have aspirations for perfection.  An innovation manager must know the big picture and enough of the details to see how they fit together, and must take end-to-end project responsibility.

Innovation typically requires multi-disciplinary perspectives, and integration of the right resources, values, people and structures.  It means getting the key people involved right from the beginning and making certain they interact together.  It is team-based, and can involve multi-paradigm team members looking at an issue from different perspectives.  A key to innovation is not to be over-specialised, and to apply insights from different fields. 

Innovation often requires cross disciplinary approaches and understanding of design, arts, psychology, ergonomics and other disciplines.  It needs to foster how disciplines interact and learn from each other.  Understanding aesthetics and design, and integrating this into production was a key strength of Apple and many other leading edge “technological” companies.  One of Steve Job’s achievements was linking behavioural psychology, ergonomics and technological innovation.

Managing innovation requires integration of many inputs in real time and over a project’s life.  Innovation can come from technological convergence that combines existing technologies in new ways.  This is why engineers, architects and others used to integrating knowledge can be effective innovation managers even in food or biotechnology companies they are not disciplinary experts in. What is typically needed for most major innovation are integrators who are not themselves specialists.

Sources and forms of learning, knowledge application and innovation are highly differentiated and it is a mistake to associate innovation with science-push, laboratory-based research.  Most knowledge-based manufacturing and services businesses in New Zealand that have created competitive advantage have a significant technological advantage, however it fits within a wider suite of complementary capabilities in such fields such as customer service, design, marketing and other competencies.

Innovation involves two-way interactions and learning with users, and this means understanding how users learn and adopt new innovations.  Commercially-oriented research should focus on today’s problems where they foreshadow larger future markets rather than take a speculative punt on the future.  In doing so, a meaningful problem for today can be addressed through interactions with today’s potential users, and spin-off knowledge may arise that seeds new opportunities for the future.

Market structure and industry sector, core technology, supply chains, and a host of other highly differentiated factors shape the sources and forms of innovation learning.  For example, pastoral farmers may learn from centralised technology providers such as AgResearch.  Pig and poultry farmers may learn from feedlot nutritionists and vets.  IT companies may learn from the web and social media.  Industrial machinery producers may learn from manufacturing businesses they supply.  As a general rule, the more homogenous an industry in product markets and factor inputs the more suited it is to centralised research institutes as innovation sources.  The more differentiated an industry or business the more the locus of innovation will differ, and the more decentralised must be any structural or financial support for innovation.

Innovation, like trade, must be an open system. Open innovation recognises most of the smartest people and best ideas exist outside an organisation.  Skype was founded by a Swede and Dane in London, contracted much of its programming to Estonian software developers, and was sold to Microsoft for more than US$8 billion.

Not even the biggest industrial corporations or countries can access their innovation inputs from their own internal capabilities.  This has always been true throughout history.  In the first book of the Odyssey Athena arrives in Ithaca in the guise of an Athenian ship master coming to trade iron for bronze.  Trade diffused metallurgy, mathematics and animal husbandry across the Asian-European continent.   A key to Henry Ford’s success was the early adoption of vanadium steel alloy – technology adopted from France, while the key to New Zealand business innovation is almost always catalytic ideas and technology from offshore.  In open innovation, participants self-select.  However open innovation is not always a universal innovation model.  Apple in some key product developments rejected open innovation and succeeded.

Most major new disruptive technologies come from outside existing industries.  These disruptive technologies occur rarely and are unpredictable, so businesses lack the structures and capabilities to adopt and make them productive.

While new technologies come from outside an industry and this means an outward-looking and open innovation approach is needed, businesses also need to retain the core in-house competencies to search for and adopt new technology from outside sources.

Ignorance of a field can be an advantage as it can lead to innovative solutions.  Henry Kaiser transformed the US ship building industry in World War Two from a background of no knowledge or competencies whatever in the field.

Innovation can mean changing a customer’s expectations and creating and meeting a need a customer was unaware of.   ‘Solutions’ often cannot be fully sold to a buyer unless the buyers add something themselves.  An example is some prepared meals which failed in the market until consumers could add, for example, an egg or meat so they felt part of making a meal.

Innovation can come from individuals, some of whom can create whole industries and urban agglomerations that grow up around them.   David Griffith was pivotal to Hollywood’s emergence as the global film-making centre, developing close-ups, flashbacks, fade-out and other film directing innovations.  His greatest achievement was probably Birth of a Nation in 1915.  Peter Jackson was the key figure in creating New Zealand’s film making industry.  This created a wider cluster including post-production and digital content industries, with spill-overs to fields such as gaming.

Innovation can be triggered by an industry pain point, or a sudden recognition of where a major cost could be eliminated by seeing things from a different angle.  An example is containerised shipping, where it was recognised improvements in ship design offered only minimal gains, and the real leap forward was overcoming the ship loading and unloading costs.

Innovation can come from sudden discontinuity, such as a demographic or lifestyle change.  Rising health and superannuation spending may trigger fiscal pressures for frugal innovation whether social or technical in nature.  Innovation can come from simplifying products through frugal innovation.  A Ray Avery demonstrated,  technology developed for wealthier consumers can be reinvented and supplied to a poorer world developing market.   Much of Tata Group’s competency is in frugal innovation.  However it was also able to address the compliance costs associated with India’s complex and stifling regulatory system.  This strength is so important it allowed Tata to compete over many different product markets even where it lacked strong technological competencies focused on those markets.

Innovation can come from industry and market disparities, process vulnerabilities, and changes in perception.  It can come from new knowledge and recognition of new technologies’ disruptive power.  Bill Gates realised hardware power was increasing so microprocessor power was almost free and software was the scarce resource.  Gates developed software ahead of the hardware, knowing the hardware would catch up.

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About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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2 Responses to Essays on Management: What is innovation and where does it come from?

  1. ashokbhatia says:

    An insightful post! The factors which go on to create the ‘a-ha’ moment are not easy to look at from an analytical perspective alone. The intuitve faculties – whether at the persoanl or at the collective level – also play a crucial role.

    You may like this light hearted post of mine:
    http://ashokbhatia.wordpress.com/2013/01/23/of-idleness-innovation-and-the-peter-principle

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